CAQ Tool Aids Audit Committees on Non-GAAP Metricsby
A new publication released by the Center for Audit Quality (CAQ) on June 28 is intended to help audit committees determine whether non-GAAP measures give investors meaningful financial information.
Company presentation of measures that do not conform to US GAAP has increased in recent years, prompting more scrutiny from the US Securities and Exchange Commission (SEC). While not illegal under SEC rules, non-GAAP measures “must not be misleading” and “are intended to supplement the information in the financial statements and not supplant the information in the financial statements,” SEC Chief Accountant James Schnurr said last March.
In May, the SEC updated the compliance and disclosure interpretations on its regulations specific to the presentation of non-GAAP measures in SEC filings and other company communications to investors, such as earnings releases.
“Despite the fact that GAAP measures sometimes get forgotten once analysts and the press start commenting on a company’s results, investors should refer back to a company’s financial statements so that the non-GAAP measures are put into the proper context,” Wesley Bricker, SEC deputy chief accountant, said in May.
Therefore, Bricker said, “audit committees should be paying close attention to the non-GAAP measures a company presents, including the required related disclosures, and the processes it follows to consider both the appropriateness and reliability of the measures.”
In Questions on Non-GAAP Measures: A Tool for Audit Committees, the CAQ provides examples of the types of questions audit committees can ask management and external auditors that are specific to non-GAAP financial measures.
“The dialogue resulting from the questions … will help refresh an audit committee’s understanding of how management is following SEC regulations, and understanding management’s purpose in presenting a non-GAAP measure, why it is being used, and whether it is reasonable and consistent,” the publication states.
The questions can also be used to evaluate “other non-GAAP information that does not meet the SEC definition of non-GAAP financial metrics, but may be relevant to the audit committee’s understanding of the overall communications to investors relative to the company’s performance,” according to the publication.
“This tool can help audit committees probe whether such measures are accurate, appropriate, and useful to investors,” CAQ Executive Director Cindy Fornelli said in a written statement.
The questions are grouped under three core categories:
Transparency. The tool offers audit committees ways to consider the purpose, prominence, and labeling of non-GAAP information, specifically in relation to traditional GAAP measurements. For example, has the non-GAAP measure been given more prominence than the most directly comparable GAAP measure?
Consistency. The tool suggests ways that audit committees can question management to determine whether non-GAAP measures are consistent and balanced. For example, do the measures eliminate similar items that affect both revenue and expense, or do they only eliminate one or the other?
Comparability. The tool provides questions to promote the comparability of non-GAAP measures presented. For example, do other companies present this particular measure or similar measures? If not, why is this measure important for this company but not its peers?
The tool also reviews current regulation governing non-GAAP information, as well as the auditor’s role in this area.